Last Thursday the market action was becoming FAR TOO reminiscent of the runaway stock market bubble of the summer. Especially given how it was the same old tech stocks leading the way…
This led us to add 3 fresh stocks into the Reitmeister Total Return portfolio. This scenario is what is behind door #1.
On the other hand, the historical pre-election pattern shows several rallies falling just short of the all time highs and then the market tumbling in the final weeks into the election. This lies behind door #2.
Which version of history will repeat itself…the summer bubble or the pre-election sell off?
Let’s peak behind both doors to determine which to walk through.
The action the last few weeks sure feels like “The 2020 Bubble Part 2”. Let me explain it with the following three storylines.
Storyline #1: Tech Stocks Leading the Way
OK, this is an old story line that worked all summer long. So in the midst of a bubble investors don’t think “Hey its times to change course and let a new group take the lead”.
No a bubble is that whatever worked in the past will work again in the future. That is why I often refer it to pressing the “Easy Button”.
But the real oddity here is that this is taking place all the why the government is talking about breaking up the seeming monopoly powers of the big tech companies. So for tech to rally as the risk of this story picks up is stupefying odd to the rational thinker. And the loss of reason is another hallmark of a bubble.
Just to reinforce the absurdity of the returns. Please check out these results from Monday.
+0.63% for Mid caps
+0.67% for Small caps
+1.64% for S&P 500 which is top heavy with tech stocks
+2.56% for Tech Heavy Nasdaq
Storyline #2: Likelihood of Delayed Election or Contested Election Growing Stronger
We have talked ad nauseum about the historical pattern of the market falling into an election. Indeed that took place a little in September. But it is only supposed to get uglier in October. And yes…this still could happen.
However, right now the market is gaining steam to the upside. And in all the usual suspects of the past (Tech, FAANG, Tesla etc). This is completely ignoring the likely damage that would be caused to the market from the uncertainty surrounding a delayed or contested election. And the evidence is mounting by the day that both of these are strong possibilities.
So once again, ignoring clear and present danger is a sign of a bubble.
Storyline #3: Market is Rallying Because of Stimulus Talks
That is kind of funny when you consider that the market is rallying because economy is so bad that we need a 3rd round of stimulus. But no one cares about government debt (yet) and it does improve the prospects for the economy. So yes, it is true that stimulus is a positive for the stock market.
But now consider the following: Did you ever think for a second that there wouldn’t be more stimulus?
Of course we all know it is coming sooner or later and that any delay is just the typical “sausage making process” of government negotiations.
Simply stated, more stimulus was a given. So to rally on this news as if it was a SURPRISING positive is kind of odd. Like the kind of activity that happens in a bubble market when the market rallies for any and all reasons even things that are as obvious as the nose on my face (yes, I have a large nose…that’s the point 😉
Adding the 3 points above sure feels a lot like the second coming of the summer bubble rally led by tech stocks. Yet this seeming runaway rally is still did run out of steam about 40 points below the all time highs set in early September at 3,588.
Maybe that is because the…
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